We are pleased to have completed one full year at Downtown Investment Advisory and to present the first blog article of 2015, a “behind the numbers” analysis of 2014 stock market returns. 2014 was a strange year for the markets, with two key surprises that amazed just about everyone: the more than 50% decline in oil prices and the sharp drop in the benchmark 10-year U.S. treasury rate from 3.03% at the start of 2014 to 2.17% at the end of the year (both trends continue into 2015). With European government bond rates still below U.S. rates (e.g. the equivalent rate in Spain is 1.64%), U.S. treasuries still seem like a bargain. While oil prices may appear like they will be down forever, the supply/demand balance can change rapidly. In the first week of January the number of U.S. drilling rigs dropped by 3.5%, the largest one week decline in active rigs since 1991. Production is likely to eventually decline worldwide, while SUV sales in the U.S. were up 17% year-over-year in December 2014. The U.S. market as measured by the benchmark S&P 500 index was up strongly at 13.7% (includes dividends earned and reinvested), the third consecutive year of double-digit gains. However, looking deeper the results were mixed. For example, the Russell 2000 index, which includes a broader range of stocks, was up only 4.9%, while the Dow Jones Industrial Average, which tracks 30 of the largest companies, was up 7.5%. International stocks had a dismal year; for example, the MSCI EAFE index which is comprised of non-U.S. developed markets lost 4.2% due to relatively weak non-U.S. economies. Investors with a range of stock market investments may have therefore only netted a 4%-6% total return (e.g. 25% allocated to each of the above four indexes returned 5.5% for 2014). Once again mutual fund investors badly lagged the indexes, as 79% of stock mutual funds failed to beat their index benchmarks in 2014, similar to previous years. We will examine this topic in a future article. While most stock investors should be pleased with 2014 returns, the return profile over the last 15 years still remains anemic. The chart below, updated from our early-2014 chart, shows market returns for the past 15 years starting January 1, 2000. The first column after the year represents the total return for the S&P 500 for that year (percentages in parentheses are negative returns). The next column shows the value of $1,000 invested on 1/1/2000. At the end of 15 years an investor would have $1,863, up from $1,639 at the end of 2013. As the chart shows, the decade of the 2000s was a losing decade for the market with $1,000 invested on 1/1/2000 worth only $909 ten years later. The last column summarizes annualized returns over these same periods. For the 15 years ended 2014, the index returned only 4.2% per year. This is up from the annualized return for the 14 year period 2000-2013 of 3.6% per year.

The key conclusions from this chart:

Stocks have been a weak investment for the past 15 years. For this entire period annualized returns have been either negative or low single-digit, far below the long term average of about 7% annualized going back to the late 1800s or 10% annualized going back to 1926. Yes, if you got in at the bottom in 2008 or 2009 returns have been marvelous, but unless new to investing this is not the case for most investors.

2012 to 2014 returns have been significant, but still don’t make up for the “lost decade” of the 2000s. In fact, according to data compiled by Yale Professor Robert Shiller, only at the end of 2014 did the market achieve a new high on an inflation-adjusted basis since 2000 – meaning that until the end of 2014 stock market investors have been at a loss after adjusting for inflation. Stocks are supposed to protect against rising inflation but they failed to do so for a decade and a half.

In our same article in January 2014 we noted that 2013 was really the first year of genuine stock market gains for investors as 2009 through 2012 was simply “digging out” from the massive declines of 2008. 2014 represents the second year of growth, but still leaves longer term stock market investors underwhelmed and lagging many other investment sectors, such as high-yield bonds which have returned 7.3% over this same time period with about 1/3 less risk.

Predicting 2015 stock market returns is a futile exercise and ignore temptations to exit or enter the market based on “feelings” for 2015. Analysts will refer to various statistics explaining why the market is over or undervalued or make analogies to previous market cycles to predict the future – it’s all worthless. The recently published chart shown below is quite interesting as a historical tracker of market performance over time. It tracks the previous 10 year return for the S&P 500 on a rolling basis. For example, looking at only the last 10 years from 2005 to 2014, returns for that period were 7.6% per year. The most recent peak was in the late 1990s, with the trailing 10 year return approaching 20% per year. The average from the 1920s to 2014 is about 10%. This chart supports a continued trend of stock market growth, although year-to-year anything can happen.

Another key data point is that the market has never been down over any 20-year period. In fact, the worst annualized trailing-20 year return came in at 7.7%. So while year-to-year and even decade-to-decade performance has historically been choppy, over 20 year periods robust returns have been the rule. This supports DIA’s key thesis of stock market investing, which we do believe is important for most investors: at least a 15-20 year time horizon is required. If an investor is uncomfortable with stock market risk, the solution is to make a permanent reduction in the portfolio’s allocation to stocks, and leave what is left in place for the long term.Year-end update for Downtown Investment Advisory (DIA): As noted, DIA completed its first year and now serves about 20 clients in four countries representing approximately $17 million in assets under management, with accounts ranging in size from $50,000 to over $3 million. While day-to-day management of investments is the core business, DIA has also enjoyed assisting clients with general financial planning, from helping to assess a buyout offer from a job to setting up a plan for a family to pay for college. DIA’s investment strategies vary, with many clients asking us to set up fixed income portfolios that generate steady retirement income or selecting a portfolio of stock ETFs. High cost and underperforming mutual funds continue to plague many of the portfolios DIA has evaluated. DIA's value proposition remains sophisticated, conflict-of-interest free investment management services tailored to each client, with an emphasis on intense personalized service and attention, at a highly competitive cost.

Note that this article was written to provide information and education, and is not intended to be considered investment advice, which can only be provided by DIA following a consultation and execution of an Investment Advisory Contract. Please scroll to the bottom of the webpage to access link to further important disclosure and terms of use information.

This website does not constitute a solicitation to purchase or sell any securities, nor is it intended to provide specific investment advice. Past performance is no guarantee of future performance. Please click here for further disclosure information and terms of use. Registration with the SEC does not imply that DIA, or any individual providing investment advisory services on behalf of DIA, possesses a certain level of skill or training.

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